Operations, Sales & Marketing, V8I2

What’s in a Price?

(Photo courtesy of Angèle Kamp on Unsplash)

In September of 2015, I spent $25 on a cup of coffee. I’m sure there are many thrifty souls who immediately say, “What a rip off!” or maybe send a message more specifically targeted at me, “What an idiot!” 

I assure you that there have been times I’ve entertained similar ideas in my own head. The memory of this cup of coffee, however, carries with it no regrets. 

I was in Venice, Italy, with two of my daughters. We had lattes in a patio area of St. Mark’s Square while a string ensemble played music. The experience was surreal. The service was impeccable. But it did cost us $75! 

Let’s be honest. Those lattes could be recreated in your home kitchen for 50¢ each. Granted, you would have needed to invest in some equipment. But a hand grinder ($19.95) and an AeroPress ($29.95), along with a few ounces of quality coffee beans, would have allowed you to have many lattes for $75! 

But there’s more to a cup of coffee than the sum of its parts.

The average cost of a cup of coffee brewed at home is between 16-18¢. Get that same amount of caffeine at McDonald’s as a senior, and it’s $1. At the local convenience store or gas station, you can pay closer to $2. Go to a Starbucks, and the average coffee price rises closer to $4. Slip over to a third-wave coffee shop, and $5 is a good average. Then there are those places where you can spend more—like $25!

What’s in a price? How does a buyer determine value? How does a manufacturer or retailer determine the price they will charge for their goods or services? What’s in the price of a shed?

One simple metric that has been extolled over the generations is a metric of three basic criteria: price, service, and quality. In this school of thought, you can pick two as a point of focus but not all three. I think there is some validity to this. 

Let’s dig a bit deeper into the world of sheds. 

Just as you can get that boost of 95 milligrams of caffeine at many different price points, you can also acquire that 120 square feet of dry storage space at many different price points. And people are spending from 45¢ per square foot (the tarp my friend uses to cover his lawnmower and woodpile) to well over $200 per square foot, every day. 

As a business, you will need to decide which segment of that market you want to serve, build out your product line, and then value-add a service plan and pricing structure to deliver excellent value to your chosen target market.

The most important part of this entire equation is your particular product in your particular company for your particular market. So much of the industry has a “competitive pricing strategy” that merely looks at what others in the industry charge for their product and then sets their own pricing in relation to that—a little more, a little less, or similar to be “competitive.” 

Rather, be crystal clear on the strategy you envision for your company and then build and run your company with the level of quality and finish you choose, supported by your desired client care plan with an appropriate pricing structure to achieve your end goal.

There are primarily five categories in creating your overall pricing strategy: 

1. Cost of materials or BOMs (bill of materials): While this can be managed by your choice of suppliers, grade of materials, and the quantity and quality of materials used in production of your product, it is also very susceptible to market forces. Historically these prices have been stable. In the past two years, they have become extremely volatile, resulting in all sorts of pricing challenges.

2. Cost of Goods or COGs: Materials plus direct labor, indirect labor, and manufacturing overheads.

3. Distribution: Getting the product from the factory to the end user—whether that is a dealer or customer, or whether that includes both, half and half, site built or delivered, or wholesale only with pickup at factory. This area of huge divergence in the industry makes it a very specific measurable, unique to each company and or strategy.    

Inside these variables are also a broad spectrum of efficiencies and inefficiencies. The final setup offered is also a big factor in these costs—who is responsible for those costs? Is the customer responsible for providing the setup materials? Is the customer responsible for preparing the site? To what standard? If the preparation is subpar, who determines that and who pays? Is all of this clear in the sales process, or a surprise to the client in the closing moments of the transaction?

4. Sales & Marketing: What does it cost you to let potential customers know you exist? How will you go about doing this? How will you compensate your sales staff? If you operate strictly as a manufacturer with a guaranteed sale for your products, this likely is not even a line item on your P&L. 
If you are a wholesaler, it is likely a small line item. If you are a direct-to-consumer manufacturer, you will spend significantly more on this category. 

5. General Administrative: If you commit to a high level of customer satisfaction and exceptional communication experience, you will need to invest in both people and technology to deliver an extraordinary experience in terms of information and communication to the client. This costs money. If on the other hand, you decide to “lean out,” you can significantly trim your overhead in this area. 

This overhead category is also impacted by the level of commitment you hold to people development—will you provide ongoing training for your people? Leadership development? Training programs? 
Is your model—like mine was for a period of time—only taking a minimal wage from the company to preserve cash for growth? Or are you committed to paying competitive market salaries to yourself (owners) and management and employees? 

Will you meet or exceed the typical market benefits around life and health insurances, retirement plans, competitive sick leave and paid vacations, or will you not offer these benefits? These sorts of decisions have a huge impact on the general administrative costs.  As such, they impact the pricing structures of your product. 

There are “cut-throat” models in every industry, and the shed industry is no exception. Many of these revolve around marginally legal models, using subcontractors to fix costs and avoid the overhead of employment law. 

Some of these business models permit the only variable in pricing structures to be the actual cost of materials. Everything else is fixed. This can be very attractive on the surface but may well be susceptible to a costly legal challenge. 

All these variables are essential to answering the question, “What is in the price of a shed?” It points to what I believe is the key issue. Establish your company’s vision and mission and then adopt the strategies that will help you get there. Only then can you realistically establish the pricing model for your products. 

You can also start with determining what your product will sell for then work backward to what can you spend in each of the above categories and still be profitable. When people and companies start with the pricing of a product, strategies tend to be in flux. Company culture is regularly sacrificed. People become dispensable tools rather than important resources for development and investment. And ultimately, the overall customer experience suffers.

You decide. Then measure what you need to manage. While you will want to know your position in the marketplace regarding pricing, it is most important that you establish and maintain a pricing structure that allows you to achieve your most important vision and mission while remaining true to your core values.        

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